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07/30/2005

Social Responsibility: Posner's Response to Comments

These were, as usual, very interesting comments. The most common was that corporate CEOs are overpaid, and this is argued to contradict concerns expressed by Becker and me with corporations' conceiving their role as that of charitable, or "socially responsible," enterprises, rather than as pure profit maximizers--if they are really maximizing profits, why are they overpaying their CEOS?
I don't know whether CEOs are in general overpaid, but let's assume they are. This would imply that the shareholders, who are the nominal owners of the corporation, are incapable of controlling management--in other words, that there is a problem of what economists call "agency costs." (The term signifies the costs resulting from the principal's inability to constrain his agents to serve his goals exclusively.) If so, we certainly would not want the management to make gifts to charity, because that would exacerbate the problem of agency costs. Managers who are not controlled by shareholders can't be presumed to make charitable gifts that will promote the shareholders' welfare, rather than the managers' own. So, paradoxically, liberals who believe that CEOs are not honest agents of the shareholders should be more critical of corporate "social responsibility" than conservatives!
One comment that I am quite sympathetic to is that the social return to profit-maximizing activities may actually be higher than the social return to corporate philanthropy, when "corporate philanthropy" isn't just a fancy name for public relations. As I argued in an earlier post, philanthropy directed at poor countries may actually reduce the welfare of those countries, and the same is probably true to an extent of purely domestic charity. The general effect of charity is to postpone the making of difficult decisions. For example, philanthropic gifts, private or public, to the arts retard serious efforts by artists and artistic organizations to create work for which there is a genuine interest on the part of the public, and philanthropic gifts to universities help to shield them from competitive pressures. Also, the agency costs problem is particularly acute in the charitable arena, as donors to charitable enterprises have even less control over the enterprises than shareholders do over their corporations.
This is not to suggest that the net benefit of charitable giving is negative, but only to raise a question whether the net benefit of the expenditures devoted to charity might be greater if directed to commercial or other private ends instead.
Let me respond finally to two comments about the issue of criminal liability of corporations. One comment suggested that as long as individual managers are liable for crimes committed by them on the corporation's behalf, there is no reason to impose liability on the corporation as well, and therefore no need to place a duty of law-abidingness on the corporation. But imposing criminal liability on errant managers is insufficient. If their crimes benefit the corporation (though imposing, as I assumed in my original posting, greater costs on society as a whole), then their salaries will be set by a rational corporation at a level that will compensate them for assuming the risk of criminal punishment.
The other comment pointed out correctly that corporate criminal liability is not an either-or thing. Often it will be unclear whether a proposed course of action will violate criminal laws applicable to the corporation. There is no reason the corporation should be thought under a duty to avoid all risk of legal liability; that would be paralyzing, and also would discourage socially worthwhile tests through litigation of the outer bounds of liability. Rather, the duty should be to avoid conduct known to carry a very high probability of being deemed criminal.
With respect to many civil as distinct from laws, it is unclear whether they should be thought to impose a duty of compliance, or merely to impose a price (in the form of an expected liability cost) for engaging in particular activity. If the law imposes only damages liability for a particular unlawful act, and the damages are fully compensatory, then a corporation that commits the act is not imposing net social costs; it would not engage in the act unless the expected benefits exceeded the exepected costs to any victim of the act, as measured by the damages that the victim would be entitled to recover.